Personal view: New rules on economic crime will have a limited impact on behaviour

Unless the Government changes its approach to how companies are held
criminally liable, "deferred prosecution agreements" will have a
limited impact.

The new enforcement tool will enable prosecuting authorities such as the Serious Fraud Office to initiate criminal charges against a company and then suspend their pursuit on agreed termsPhoto: REUTERS

By Jonathan Fisher

7:30PM BST 22 Jul 2012

The deadline for consultation on new rules that will allow companies to enter plea bargains, known as “deferred prosecution agreements” (DPAs) for financial crime is just weeks away. It means the new law governing the prosecution of financial crime is fast becoming a reality. However, unless the Government changes its approach to how companies are held criminally liable, the introduction of DPAs will have a limited impact.

The new enforcement tool will enable prosecuting authorities such as the SFO to initiate criminal charges against a company and then suspend their pursuit on agreed terms. Typically, these will involve payment of a large financial penalty, disgorgement of criminal profits, victim restitution and measures to prevent future offending such as a monitoring or reporting requirement.

Making a DPA has significant advantages for both a prosecutor and a company. A prosecutor will be keen to make a DPA because criminal cases are extremely expensive to investigate and prosecute, and there is no certainty of outcome.

Meanwhile, from a company’s perspective a DPA offers swift resolution of criminal proceedings, with minimum publicity and limited impact on shareholders, employees and creditors.

This is not to say a company will want to rush into making a DPA when offered an opportunity to do so. A prosecutor will require a company to publicly admit the extent of its wrongdoing and undertake not to contest the admission in the future. The Government emphasises that although not a conviction, there are circumstances where a DPA should be treated as seriously as a criminal conviction.

There will be some hidden consequences. An admission can be used in evidence against a company in subsequent criminal or civil proceedings, and evidence underlying the admission can be used to prove the offending conduct against an employee. Even though a DPA will not debar a company from public procurement contracts, it might impact adversely on its ability to raise funds.

In these circumstances, a company’s decision whether to make a DPA will be a matter of fine judgment. One critical aspect will involve an assessment as to whether a prosecutor is likely to initiate criminal charges if a company declines the prosecutor’s offer. This is the prosecutor’s Achilles heel. Under the present law, a company will not be criminally liable unless the prosecutor proves the offending conduct was committed in a manner which can be imputed to a director or senior executive officer who represents its “directing mind and will”. Put simply, the acts constituting a criminal offence must have been committed by a person, usually a director, who can be identified with the company’s decision-making process at the highest level.

This requirement is a significant impediment for a prosecutor. It means that illegal conduct committed by a non-board member is not sufficient to make a company criminally responsible. Unless there is a change in corporate criminal law, the Government should not expect to see a lengthy queue of companies outside the SFO’s offices waiting to confess their wrongdoing.

Bribery cases are different and the early DPA cases will almost certainly involve this form of criminal conduct. This is because Parliament circumvented the normal rules of corporate criminal liability when enacting section 7 of the Bribery Act 2010. Under this, a company is made criminally liable when bribery occurs and the company cannot show that its anti-corruption policies and procedures were adequate to prevent its occurrence.

There are strong arguments for extending this form of liability to all cases of economic crime. In the case of an individual, the nature and extent of the offending conduct is the focus of attention. In the case of a company, different considerations apply. Attention is focused on the systemic failure of a company’s operating controls which enabled the individual to act as he did.

Under the present proposals, the Government estimates there will be between seven and 15 DPA cases each year. This contrasts sharply with the US where broader rules for corporate criminal liability facilitate widespread use of DPAs in cases ranging from fraud to breach of sanctions.

If the criminal law is to make a significant impact on behaviour in the boardroom, the Government’s initiative must be accompanied by provisions which broaden the Bribery Act offence. It’s not difficult for the statutory draftsman to extend the offence to embrace other forms of economic crime where a company has failed to institute adequate systems and controls.

Jonathan Fisher QC is a practising barrister at Devereux Chambers London and a visiting professor at the London School of Economics